In 1982 Section 21.03 of the Texas Property Tax Code was established to provide an appraisal method for property taxable in Texas but used regularly or irregularly out of state that fairly reflects its use in this state.  While the wording of the section is somewhat ambiguous the meaning to taxpayers is pretty simple.  If you own mobile personal property that is used out of state in the previous year a special valuation method is available to you which can result in substantial tax savings.

Interstate Allocation is not an exemption so filing for this status is not through an application but through a Rendition of Property Qualified for Allocation.  This special rendition must be filed with the Texas Appraisal District where the property is taxable between January 1^st and April 15^th of each tax year.  An automatic 30 day extension is available upon request with an addition 15 day extension possible for good cause.

Various types of property are eligible for this valuation but it is imperative that the owner be able to document/quantify use in this state and other states.  This documentation is often in the form of travel logs by mileage but any data that establishes measurable use in other states will do.  Tractor trucks, vessels, automotive fleets, salesman vehicles, commercial and business aircraft among others are types of assets possibly subject to this appraisal option.

Once you have submitted the rendition for your property subject to allocation the calculation are pretty simple (excepting commercial aircraft) and are generally total use in Texas divided by total use equals percent taxable in this state.

For example, a trucking company in Texas has a truck tractor which has a market value of $100,000 as of 01-01-2012.  Mileage logs for the truck indicate the truck traveled 50,000 miles in Texas and 200,000 miles in other states.  50,000/250,000 = 20% so the actual taxable value of the truck for the year is $20,000.  If the tax rate for the county where the company is located is 2.75% the resulting tax savings for the allocation method is $2,200.  Imagine the tax savings for a fleet of interstate trucks.

This same methodology with some differences in calculation requirements can be applied to aircraft, vessels, and even equipment.  If you are eligible for appraisal under this section you should be taking advantage of the significant tax savings.  Assessment Advisors agents have over 20 years experience dealing with allocated property so help is call away.

In 1989 Texas voters approved a constitutional amendment giving local property tax jurisdictions the option to exercise or not exercise, their authority to tax specific personal property, otherwise known as freeport goods.  The freeport exemption exempts certain types of tangible personal property for taxation, generally inventory, raw material, goods in process, or stored goods in transit.  To quality the property must meet the following criteria:

1. Acquired in or imported into Texas to be forwarded out of state.
2. Detained in Texas for assembling, storing, manufacturing, processing, or fabricating purposes by the person who acquired or imported it.
3. Transported out of state within 175 days after the date the person acquired it, or imported it, into the State of Texas.

Oil, natural gas, and other petroleum products were excluded from eligibility of the exemption and remain taxable.

The application and qualification process is very simple and straightforward.  The amount of freeport tax exemption for goods received each year is based on the percentage of qualified freeport goods sold in the previous calendar year.  A one page application must be filed with the appraisal district of the county where the goods are located and requests that a company provide information to identify qualified freeport good sold in the previous calendar year.  The application must be filed between January 1^st and May 1 of each tax year.  A late application may be accepted up until roll certification subject to a 10% penalty.  Most appraisal districts require documentation be submitted to prove the goods do qualify for the exemption.  Companies rely on internal sales reports, customer lists, financial statements etc to meet documentation requirements.  The ability to track the goods from acquisition to disposition or shipment out of state is very important.

For example, a company which manufactures oilfield equipment has an inventory value of $2,000,000 and shipped 70% of their product out of state within 175 days in the previous year would receive an exemption on inventory of 70% for the tax year with jurisdictions that allow the freeport exemption.  If the cumulative tax rate for those jurisdictions was 2% the resulting savings would be $28,000.

If you manufacture, store, sell or distribute goods in Texas and ship out of state you should take advantage of this exemption and take advantage of the significant savings.  If the application or documentation process seems daunting or time is an issue Assessment Advisors can help.  Our agents have over 20 years experience dealing with freeport exemptions and inventory valuation issues.

This will give a very simplified summation of the appeal process including who is involved, the appraisal process, common assessor flaws, and the taxpayer’s remedies.

Players and Their Roles

Appraisal District – responsible for appraising all taxable property at its January 1 market value.  Does not assess taxes on properties.

Tax Collector – responsible for assessing and collecting taxes based on certified appraised values multiplied by tax rates of local jurisdictions.

Property Owner – responsible for understanding appraisal, assessment, remedies, and deadlines for remedies.

Know Your Property

Appraisal records may have inaccuracies which lead to incorrect assessments, to include:

- number of units / square footage

- unit mix

- amenities

- usable building and land area

The Appraisal

Cost Approach – most commonly used for new construction.  Considers replacement costs new of improvements, applies depreciation, and add back market value of land.

Flaws –  If improvements are not accurately identified and classified, then impossible to come up with accurate valuation. Rarely reflects market value.

Sales Comparison Approach – often leads to aggressive valuations.  Compares sale prices of similar properties, making adjustments for differences, to derive at value for subject.

Flaws – Sales comparables often not confirmed, so accuracy of data is questionable.  Assessors typically provide gross sale price range, often not making adjustments for differences in comparison to subject property.  Artificially low cap rates due to non-realty factors included in purchase.  Prices may be inflated due to projections that do not materialize, nor reflect value as of date of sale.

Income Approach – capitalization of net income stream to determine value.   Typically most accurate, but not with mass appraisal.

Flaws – CAD/Assessor estimates market data to include rents, vacancy, expenses, and cap rate.  CAD rarely accounts for all rental concessions.  Subject actual income and expense factors may vary dramatically from CAD model/estimates.  Cap rates used to derive value often artificially low.

Appeal Steps

- Discuss your assessment with the appraisal district to see if correction can be made to assessment based on your evidence of value.

- File appeal and once again present errors in county assessment as well as your evidence to appraiser.  If satisfactory adjustment is not granted, present your case to the Appraisal Review Board for determination of value.

- If desired, defensible valuation not granted at review board, file binding arbitration or lawsuit.

Obviously this is a very simplified outline, and each property has unique issues affecting it and its assessment.  Please feel free to contact us to discuss a more detailed game plan on how we can pursue tax savings for your properties.

The appraisal district is tasked with determining market value of all properties as of January 1 of the current year.  As you might imagine, this is not an enviable assignment as they don’t have the time, manpower, or data to complete individual appraisals for every property to ensure accurate assessment.  Thus, the appraisal district must employ mass appraisal.

Mass appraisal is in essence a short-cut or tool utilized to value a large volume of properties in a short time period, with limited information based on parameters the appraiser chooses to use.  In regards to hotels, typically the most common parameters consist of average daily room rates, occupancy, and revenue per available room.  Gross receipts are made available to the appraiser from the State Comptrollers Office.  The data is entered in to an income pro-forma model and expenses are then estimated with resulting net operating income divided by a (supposed) market derived capitalization rate to result in an indication of value.

Sounds pretty straight forward, right?  This seems like same methodology used by fee appraisers for purchases or refinances, so what is the problem?  The problems are many to include that the indication of value from this analysis is indicative of a going concern value and includes business enterprise value, and not the value of just the real estate and business personal property.

Following are additional pitfalls with using mass appraisal:

• Gross receipts provided by Comptroller may not accurately reflect actual annual room revenue for calendar year due to non-booked refunds or other accounting variances
• Expenses are estimated by appraiser.  Different property types and revenue streams will require different expense ratios (limited service vs. full service)
• Sales of hotels have declined, and appraiser does not always know if capitalization rate reported is reflective of trailing 12 months revenue or projections.  A cap rate based on projections that do not materialize dramatically overstates actual cap rate at time of sale.  Additionally, sale price reflects purchase of all assets, including business, and not just taxable property.
• Brand and/or business enterprise value has not been identified and separated from going concern value to insure that only tangibles are assessed.

What is business enterprise value?

BUSINESS ENTERPRISE VALUE (BEV)
“A term applied to the concept of value contribution of the total intangible assets of a continuing business enterprise such as marketing and management skill, an assembled work force, working capital, trade names, franchises, patents, trademarks, contracts, leases, and operating agreements.” (The Dictionary of Real Estate Appraisal, 4th ed., Appraisal Institute)

Many appraisal districts have begun to concede that a business value deduction needs to be applied to determine fair assessment, however, as you might imagine in mass appraisal it’s a “one size fits all” mentality and an arbitrary 10% adjustment does not accurately reflect business value across the board for all properties.  We have found that the business value can be as little as 10% and as high as 35% depending upon the property.

Make sure you don’t continue paying more than you should in property taxes.  It requires expertise to value just the tangible portions of a hotel, and having the right property tax consultant on your team can be worth their weight in gold (even with today’s prices)!

Mike Eckhoff is President of Assessment Advisors in The Woodlands, Texas.  The firm provides property tax appeals nationwide for commercial real estate, with a focus on income-producing properties.  Mr. Eckhoff can be reached at mike@assessmentadvisors.com.